Getting into the correct Thrift Savings Plan (TSP) L (lifecycle) fund can make or break your retirement. Some L funds are aggressive and some are wildly conservative with many in between.
But which is best for you?
How Do the TSP L Funds Work?
As of the time of this writing, there are 10 active L Funds. Here is the list:
- L Income
- L 2025
- L 2030
- L 2035
- L 2040
- L 2045
- L 2050
- L 2055
- L 2060
- L 2065
All the L funds (except L income) are named after a year in the future. Right now there is an L fund with a 5-year increment for the next 40 years.
As we approach the year for which an L fund is named, that fund automatically gets more and more conservative in how it is invested. But once we hit that particular year then that fund merges with the L income fund.
For example, once it is the year 2025 then the L 2025 Fund will go away and anyone that was invested in that fund would now be in the L income fund.
The thought behind the L funds is that employees can simply invest their money in the L fund that is closest to their retirement date and the fund will get more conservative for them.
For example, if you are planning to retire around 2035 then you can simply invest in the L 2035 Fund and never have to change your investments as it will get more conservative automatically.
The Big Problem With the L Funds
But here is the problem. The L funds all get REALLY conservative.
The L Income fund (which all other funds eventually convert to) is allocated like this as of October 2023:
- G Fund: 69.14%
- F Fund: 5.61%
- C Fund: 13.18%
- S Fund: 3.23%
- I Fund: 8.84%
75% of the L income fund is in the G and F funds. These are the more conservative funds within the TSP.
But is 75% of your retirement money in conservative investments too much?
To put this into context, the stereotypical retirement investment allocation that you hear most often from financial advisors is 60/40. This means 60% of your money is invested in stocks (more aggressive investments) and 40% is invested in bonds (more conservative investments).
The L Income fund is at 25/75 or 25% aggressive to 75% conservative.
One Size Fits Most
Now I am sure there are some situations out there where having most of your money in conservative investments makes sense, but in my experience as a financial planner, it is rare.
Most people need a better balance to make sure their money continues to grow throughout retirement to combat inflation and to make sure they never run out of money.
There are two main ways that federal employees can solve the problem of the L funds getting too conservative.
- You can invest in an L fund that is further out from your retirement date so that your money stays aggressive for a longer period of time.
- You can leave the L funds altogether and invest in the core funds (C, S, I, F, and G) directly.
For me, number 2 is the better of the two options as it requires you to have more intentionality about what you are investing in. Also, your allocation won’t change by itself over time (as it does in the L funds) so it will be much easier to remember where you have your money.
However, number 1 is often a better choice for those who have very limited investment knowledge and aren’t confident they can find a mix of the core funds that works for them.
If you want more information about how you should be investing in the TSP, check out this article.
The TSP L funds are not inherently bad, but you have to understand how they work if you want to use them well. They will all get more conservative over time so you’ll want to make sure that works for your situation.
The L funds can be a great fit for those that put simplicity above all else while the core TSP funds may be better for those that want more control.